Perhaps the biggest misconception around contract management is that a contract is “done” when it’s signed, requiring only to be stored in the equivalent of a filing cabinet, then taken out and read when circumstances demand.
In reality, a contract stored in that way is held in a perpetual state of incompletion, requiring additional review and analysis to understand its relevance and content, before you can start the (substantial) work of assessing the risk allocation it provides for.
The buildup of those blocks of incompletion is like dirt gumming up the workings of the commercial contracting machine. The smoothest running, most proactive and effective operations create and maintain a consistent approach to their contracting processes, ensuring the critically important information within a body of contracts is captured and stored effectively for easy retrieval when needed.
Whether you’re facing a regulatory deadline that requires a massive repapering project, or you’re taking a proactive approach to contract transformation, this kind of contract hygiene is critical.
While contract hygiene is only one element of the bigger picture, it impacts everything from the scope of your project to the processes you implement and beyond.
Contract hygiene is a consistent approach to contract format, negotiation, structure and storage so the critical commercial information in your contract base is accessible, understandable and manageable. It refers to contracting processes and workflows, particularly as they relate to data.
Contract data describes the information within a contract – examples range from signatures, clauses and counterparty names to pertinent dates, value and more.
Elements of good contract hygiene include a view of:
Poor contract management costs companies 9% of their bottom line, and while good contract management requires more than good contract hygiene, it’s a critical component.
Without optimized contract hygiene, organizations get stuck in an endless cycle of wishing if only we knew what we know. The contracts still exist – somewhere – post-execution. But when the data elements are inaccessible due to inconsistent processes or a lack of oversight, the potential value of that contract body is squandered.
When organizations need to mine data (for instance, in response to a regulatory change that requires repapering or insight into contracts to set up a remediation strategy), good contract hygiene allows for faster recall of relevant data – bad contract hygiene creates a project within a project. GCs rank data protection, privacy, compliance and regulations as top risk areas in 2023; poor contract hygiene makes the related challenges even more burdensome.
Why? Because if you have to search through an entire body of contracts to find the relevant clauses to review for compliance (and who knows if some are lurking out of sight somewhere), you add more work, complexity and cost to a project which likely has a defined and all-too-close deadline.
The same problem applies to supply chain disruptions, an all-too-common occurrence for many organizations in the last few years. When a supply chain disruption occurs and suppliers fail to deliver, many companies can’t access their terms and conditions (let alone any other rights triggered by the disruption) quickly enough if their contract hygiene is poor.
Time lost in reacting equates to higher risk in these and similar situations.
Good contract hygiene requires consistency in your overall approach to contracting; some of the specific elements (and related questions) to consider within that approach are:
Although good contract hygiene accumulates through a consistent approach to many elements of contract management, the value of those efforts is often only realized when it comes time to recall data.
Contract data storage must facilitate easy access – that means it should be properly organized in a readily available format within a database.
While some organizations store contracts in a repository, this leads back to the same familiar issue: if only we knew what we know. When contracts are sent to a repository post-execution, the data isn’t lost, but it also isn’t accessible.
“A repository, while good at storing things, is not necessarily great at retrieving information. You find out that you need to mine data … you go into your repository, and it doesn't have a great file structure or folder structure... you end up creating a project within a project.”
- Karl Dorwart, Head of Life Sciences, Healthcare and Consumer Staples Practice on Preparing for Future Regulatory Change
Organizations who know they need better contract hygiene often turn to tech. But no CLM tool can solve for lacking process. Technology is an enabler – it will not solve a people or process problem, which is one reason many CLM tech implementations fail.
The right technology may make it easier to recall data or less labor-intensive to store data hygienically, but only when supported by thoughtful processes.
To unlock real value from a tech tool, consider things like the process for post-execution obligation management, how you’re setting up metadata fields, and all of the other processes surrounding contract management.
Here are three practical steps to realizing greater value from your contract body.
Waiting for poor contract hygiene to become an urgent problem can cost companies significantly in the long run. While supply chain issues or regulatory burdens can prove a catalyst for improving contract hygiene, these are also potentially costly problems that a proactive approach to contract hygiene can minimize.
What’s more, good contract hygiene can make it easier for in-house legal teams to manage broad emerging risks, like those related to ESG.
Scan the horizon and ask: what data points will we likely need in the foreseeable future? Perhaps you want to better prepare for an onslaught of data privacy regulations or identify revenue leakage caused by automatic renewals in a volatile economy.
A forward-thinking mindset creates the greatest value.
Data cleanliness is a vital component of contract hygiene, but equally important are the supporting processes. Team members must consistently follow the same processes during contract negotiation, metadata tagging, maintenance and more.
When considering the contracting ecosystem holistically, the benefit of good contract hygiene as part of a larger strategy is clear. Make contract hygiene a priority to insulate your organization from risk and deliver on the potential value of your contract base.